Tips for shareholders of private corporations
Pay reasonable salaries to family members
Where you can show that your spouse and/or children have worked in the business, you may be able to pay them a reasonable salary. It is important to track their actual working hours, describe their work tasks, and define the terms of their employment. Wages must be reasonable based on the work performed and the age of the individual (i.e. school aged children).
Pay dividends to shareholders of private corporations over age 65
Despite the expanded “Tax on Split Income” (TOSI) rules for Canadian private corporations as of 2018, private corporations can continue to pay dividends to shareholders in specific situations. For example, in order to ensure consistency with other pension income splitting rules, where the business owner is age 65 or older and their spouse is a shareholder of the corporation, dividends can be paid to the spouse without attracting punitive TOSI tax consequences. If this exception did not exist, the dividend payments may be subject to the TOSI rules, which would tax the payment at the top marginal tax rate, regardless of the spouse’s tax bracket.
It is important to consult with your tax professional on any of the above income splitting strategies to find the best solution for you and your family.
Please contact us should you have any questions.